Real Estate Terms Defined: Part 2
RealEstate Terms Defined: Part 2
Every industry has itsown jargon, and real estate is no exception. Living in the South Bay,we’ve all heard the saying, “Location, location, location”, and we have apretty good sense of what that means. But what about earnest money or fiduciaryduty or PMI? Real estate lingo can add layers ofconfusion to an already convoluted process. Having a basic understandingof important real estate concepts will give you peace of mind now and couldsave you a fortune in the future.
So, we’ve compiled a listof the most commonly used terms you’re likely to encounter. Whether you’re buyingin ManhattanBeach, sellingin HermosaBeach, or just plain curious, the following real estateglossary is part two of a three-part handy reference guide for anyone enteringthe real estate market. (Clickhere for part 1)
Adjustable-rate mortgage:
A mortgage loan with an interest ratethat fluctuates in accordance with a designated market indicator -- suchas the weekly average of one-year U.S. Treasury Bills -- over the life of the loan. To avoid constant and drasticfluctuations, ARMs typically limit how often and by how much the interest ratecan vary. Many ARM products typically have an interest rate set lower thanfixed-rate loans for a few years before resetting to a variable interest rate for the remainder of the term. These mortgages are a goodoption for buyers with lower credit scores, and those who intent to move andsell their home before the fixed-rate period is up.
Amortization:
The process of combining bothinterest and principal into mortgage payments, rather than simply paying offinterest at the start. This allows you to build more equity in the home earlyon.
Appraisal:
In order to get a loan from a bank tobuy a home, you first need to get the home appraised so the bank can be sure they are lending the correct amountof money. The appraiser will determine the value of the home based on anexamination of the property itself, as well as the sale price of comparablehomes in the area.
Back-up Offer:
In the intense world of offers andprice negotiations, sometimes a home seller may have multiple offers. A“back-up” offer is when you have a second offer as back-up in case your firstoffer happens to fall through for some reason. Seen more and more in seller’s market conditions, back-up offers give the seller a strong stancein negotiations.
Counteroffer:
The rejection of an offer to enterinto a contract, where the rejecting party includes a different offer thatchanges the terms of the original offer in some way. For example, if you offer$350,000 for a house, and the seller replies that he wants $375,000, the sellerhas rejected your offer and has made a counteroffer. The legal significance ofa counteroffer is that it completely voids the original offer.
Dual Agency:
Dual agency is when one agentrepresents both sides, rather than having both a buyer’s agent and a listingagent. This can only be done with the knowledge and consentof both parties, and despite the seeming conflict of interest, the agent muststill follow through with his or her fiduciary obligation to both clients,albeit limited. The duty of loyalty isdiminished in this agency, but the agent must still maintain confidentiality toeach client and negotiate in the mutual best interest of both.
Earnest Money:
Earnest money is a deposit a buyer pays after a sellerhas accepted his offer on a home. It’s typically between 1 to 3percent of the contract price and is held by the escrow company.
Earnest money is designed to protect the seller if thebuyer walks away after the parties have gone into contract. However, buyers canget their earnest money back if a contingency allows them to cancel thecontract. If the sale goes through, the earnest money is generally applied tothe buyer’s down payment for the home.
Fiduciaryrelationship:
The relationship between a realestate agent and a client is called a fiduciaryrelationship. Fiduciary means faithful helper, and an agent is a fiduciary of theclient. The agent always has an obligation to act in the best interest of theirclient while under contract. Through this commitment the agent must provideaccountability, confidentiality, loyalty, obedience, care, and disclosure.
Fixed Rate Mortgage:
A mortgage loan that has an interestrate that remains constant throughout the life of the loan, usually 15 or 30years.
Home Warranty:
This is a type of insurance thatprotects the homebuyer from future problems occurring with things likeappliances, plumbing, and heating, which can be extremely expensive to fix.
Listing Agent:
Also known as the seller’s agent, this is the agent who represents the seller in thehome-buying process.
Market Value:
The term market value applies to what the property would cost under“normal market conditions.” Some may consider it the ‘fair value’. Unlike the “assessed” value, whichis a determination by the local authority, and the “appraised” value, whichis a determination based on comparable homes in the market, it is basically theprice a home would sell for in current market conditions.
Mortgage Broker:
This type of broker is an individual orcompany that is responsible for taking care of all aspects of the deal betweenborrowers and lenders, whether that be originating the loan or placing it with afunding source such as a bank.
Principle:
The principal balance of a mortgageloan is the amount of money owed to the lender, not including interest. Say you borrow$600,000. That’s the principal of the loan, or what you borrowed to buy thehome. Buyers pay the principal plus interest each month. Payments nearly alwaysgo toward interest first, then toward paying down the principal. After all, theinterest is the reason the bank agrees to make the loan.
Private Mortgage Insurance (PMI):
Insurance that reimburses a mortgagelender if the buyer defaults on the loan and the foreclosure sale price is lessthan the amount owed the lender (the mortgage plus the costs of the sale). Ahome buyer who makes less than a 20% down payment will most likely have topurchase private mortgage insurance, commonly referred to as PMI.
Realtor:
A Realtor is a real estate agent whospecifically is a member of the NationalAssociation of Realtors. NAR has a code ofstandards and ethics that members must adhere to. Having taken the necessary training,every agent at Levine Homes is acertified Realtor and has a duty to uphold a higher standard of ethics to eachone of our clients.
For more Real Estate terms, please refer to this Real Estate Dictionary.